Union of India v. VKC Footsteps India Pvt. Ltd.

Supreme Court of India, 13 September 2021, 2 judges

Section 54(3)(ii) CGST Act allows refund of unutilised input tax credit only where it accumulates because tax on input goods exceeds tax on output supplies; excluding input services is valid and Rule 89(5) is not ultra vires.

Facts

Section 54(3) of the CGST Act, 2017 allows refund of unutilised input tax credit (ITC) in two cases, one being where credit accumulates 'on account of rate of tax on inputs being higher than rate of tax on output supplies' (an inverted duty structure). Rule 89(5) of the CGST Rules, as amended in 2018, computes this refund using 'Net ITC', defined as credit availed on inputs, which excludes input services. The Gujarat High Court held Explanation (a) to Rule 89(5) ultra vires Section 54(3). The Madras High Court took the contrary view and upheld both the rule and the section. Appeals from both judgments came to the Supreme Court.

Questions before the Court

Does Section 54(3)(ii) of the CGST Act permit refund of unutilised ITC accumulated on account of input services in an inverted duty structure?
Is Section 54(3)(ii), so read, violative of Article 14?
Is Rule 89(5), which counts only ITC on input goods as 'Net ITC', ultra vires Section 54(3) or the rule-making power under Section 164?
Should the Court read down or recast the refund formula in Rule 89(5)?

What the Court held

The first proviso to Section 54(3) is a restriction, not a mere condition of eligibility. Refund is allowed only in the two cases it names, and clause (ii) covers only accumulation caused by the rate of tax on input goods being higher than on output supplies.
Refund is a statutory right, not a constitutional one. Parliament could confine it to input goods; the classification falls within the wide latitude allowed in fiscal legislation and does not violate Article 14.
Section 164 permits rules for carrying out the Act even where a section does not say 'as may be prescribed'. Rule 89(5), defining Net ITC as credit availed on inputs, is in line with Section 54(3) and is not ultra vires.
The Court would not read down or recast the formula, as that would enter the domain of the legislature or executive, but urged the GST Council to reconsider the anomalies. The Madras High Court was affirmed and the Gujarat High Court judgment set aside.

Why it matters

The judgment resolves the conflict between the Gujarat and Madras High Courts on refunds under the inverted duty structure in GST. It holds that the first proviso to Section 54(3) restricts refunds, applies the deference owed to fiscal classifications under Article 14, and states the limits of judicial review of a tax formula, while asking the GST Council to reconsider the formula.

In the Court's words

Copied from the official judgment; each passage links to its page.

“By its clear stipulation that a refund would be admissible only where the unutilised ITC has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies, Parliament has confined the refund in the manner which we have described above. While recognising an entitlement to refund, it is open to the legislature to define the circumstances in which a refund can be claimed. The proviso to Section 54(3) is not a condition of eligibility (as the assessees’ Counsel submitted) but a restriction which must govern the grant of refund under Section 54(3).”

Dr Dhananjaya Y Chandrachud, J.Page 104 of the judgment

“When there is neither a constitutional guarantee nor a statutory entitlement to refund, the submission that goods and services must necessarily be treated at par on a matter of a refund of unutilized ITC cannot be accepted. Such an interpretation, if carried to its logical conclusion would involve unforeseen consequences, circumscribing the legislative discretion of Parliament to fashion the rate of tax, concessions and exemptions.”

Dr Dhananjaya Y Chandrachud, J.Page 113 of the judgment

“As reasoned in the earlier part of this judgment, Clause (ii) of the first proviso is not merely a condition of eligibility for availing of a refund but a substantive restriction under which a refund of unutilized ITC can be availed of only when the accumulation is relatable to an inverted duty structure, namely the tax on input goods being higher than the rate of tax on output supplies. There is therefore no disharmony between Rule 89(5) on the one hand and Section 54(3) particularly Clause (ii) of its first proviso on the other hand.”

Dr Dhananjaya Y Chandrachud, J.Page 121 of the judgment

“The reading down of the formula as proposed by Mr Natarjan and Mr Sridharan by prescribing an order of utilisation would take this Court down the path of recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. Accordingly, we shall refrain from replacing the wisdom of the legislature or its delegate with our own in such a case. However, given the anomalies pointed out by the assessees, we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same.”

Dr Dhananjaya Y Chandrachud, J.Page 138 of the judgment

Provisions interpreted

Section 54(3), Central Goods and Services Tax Act, 2017
Section 164, Central Goods and Services Tax Act, 2017
Rule 89(5), Central Goods and Services Tax Rules, 2017
Article 14, Constitution

Case and bench

Parties: Union of India v. VKC Footsteps India Pvt. Ltd.
Case: Civil Appeal No. 4810 of 2021, with connected civil appeals
Decided: 13 September 2021
Bench: Dhananjaya Y Chandrachud, MR Shah
Opinions: Unanimous judgment of the Court by Dr Dhananjaya Y Chandrachud, J., with MR Shah, J.

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